Private mergers and acquisitions in the UK (England and Wales): overview

Q&A guide to private mergers and acquisitions law in the UK (England and Wales).

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.

To compare answers across multiple jurisdictions, visit the Private Acquisitions Country Q&A tool.

This Q&A is part of the global guide to private mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.

Laurence Levy, Jeremy Kutner and Michael Scargill, Shearman & Sterling LLP
Contents

Corporate entities and acquisition methods

1. What are the main corporate entities commonly involved in private acquisitions?

In private acquisitions the buyer is typically a limited liability company, public or private. If a limited liability company buyer does not have sufficient assets or is a newly created company, the seller will typically ask for a corporate guarantee from the buyer's owners.

The seller is usually a private limited company or a public limited company.

 
2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer

The articles of association and any shareholders' agreement need to be checked for any rights shareholders may have to make offers prior to any share transfers or other restrictions on share transfers. If the target has a number of shareholders there could also be drag and tag-along rights. Drag-along rights entitle a particular selling shareholder (usually the largest shareholder) to require all the other shareholders to sell their shares in connection with its sale of shares. A tag-along right entitles shareholders given the right to require a selling shareholder to include in its sale of shares the shares of that particular shareholder. Recent cases indicate that these provisions will be strictly construed by the courts so that, for example, a restriction on the transfer of any interest in a share will not catch the sale of an interest in the holder of that share. For such a transaction to be caught, the articles would need to contain appropriate provisions triggering transfer obligations on a change of control (say) of the relevant shareholder.

Other provisions may permit certain transfers between groups of shareholders or (for example) allow shareholders to grant certain security interests over their shares, often without triggering any of the rights referred to above.

Following a Phase 2 referral (see Question 34 ( www.practicallaw.com/3-552-5708) ), the Enterprise Act 2002 prohibits, except with the consent of the Competition and Markets Authority (CMA), any party to a completed merger from undertaking further integration or any party to an anticipated merger from acquiring an "interest in shares" in another. The CMA will rarely grant its consent. The CMA also now has power to restrain closing and order the unwinding of integration steps at any point in the merger review process.

Foreign ownership restrictions

Depending on the market concerned there could be regulatory restrictions on foreign ownership of shares in UK companies, although the UK has a relatively liberal regime in this respect. An example of a restriction could be where a target has received public grant aid money. Industries that may be subject to specific restrictions include, in particular, energy, utilities, and aerospace and defence. If a private company target has significant contracts with government agencies, an acquisition of it by any buyer, including foreign or foreign-controlled buyers, needs to be checked carefully.

 
3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?

Share purchases: advantages/asset purchases: disadvantages

Typically, a private company is acquired by buying all the issued and to be issued share capital. Any options that might be in issue (or agreed to be issued) need to be included in the acquisition, either following the exercise or by waiver of the options.

An obvious advantage of buying the share capital of a company is that all the assets of the target company are thereby acquired. In the absence of any change of control provisions in documents, whether contracts or licences, and so on, relating to the target's business (and leaving aside merger control issues), there will generally be no need for consultation with third parties or consents to assignments of contracts. However, a share acquisition will also result in all the liabilities of the target being acquired as well. It is therefore vital that appropriate due diligence is carried out and a comprehensive list of warranties (and/or indemnities) is obtained.

For asset sales, disadvantages include the fact that most assets and liabilities will probably not automatically transfer (depending on their terms), therefore assignments of contracts and novations of liabilities are usually required. Further, to the extent that an asset is not specifically included, or a liability not specifically assumed, in connection with the asset sale, the buyer will not get title to the asset or the seller will be left with the liability. This is sometimes dealt with by way of a "wrong pockets" clause in the relevant agreement. In an asset sale, the entity in which the assets and liabilities sit is not acquired. That entity is the seller of the assets and liabilities. There are usually no or very limited requirements to inform and/or consult trade unions/employee representatives on a share sale, whereas on an asset sale there will usually be requirements under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) to inform and consult such persons.

Share purchases: disadvantages/asset purchases: advantages

A key advantage of an asset purchase is that only identified assets and identified liabilities are acquired (other than those acquired by operation of law in relation to employees). However, the transfer of such assets and liabilities may require the consent of third parties (depending on the terms of the relevant assets and liabilities).

Alternative mechanisms

Where the buyer is incorporated in a European Economic Area (EEA) jurisdiction other than England and Wales, another possible mechanism to effect the transaction would be through a cross-border merger (under Directive 2005/56/EC on cross-border mergers of limited liability companies (Cross-border Mergers Directive), implemented in England and Wales by The Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974) (as amended)). This is a merger in the true sense, and so is similar to a share purchase in terms of advantages and disadvantages, except that employee representatives play a much larger role in such transactions.

 
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

If a company is owned by a private equity sponsor, that company is typically sold by auction but it can also be sold by a bilateral deal. Equally, non-private equity sales can be bilateral transactions or take the form of auctions. Generally, no particular rules or regulations of English law apply to an auction (unless the parties agree otherwise), but most sellers (operating through their financial advisers) will tend to follow a process similar to the following:

  • An auction is conducted by a corporate finance adviser, who sends out a memorandum of interest relating to the company. In the meantime, the seller puts together a data room, which increasingly is likely to take the form of a virtual or digital collection of documents, containing confidential information about the company.

  • The corporate finance adviser then receives "outline bids" from interested parties, based on the initial information memorandum and limited information in the data room.

  • Once a shortlist of buyers is identified they will receive more confidential information, including the transactional documentation, which they will then be required to mark up and resubmit with their final offer.

  • The next stage is to choose a particular buyer, who is usually given exclusivity and further confidential information about the company.

  • The final transactional documentation is then negotiated. In some cases, several bidders negotiate with the seller at the same time in a "contract race".

The seller will reserve the right to cancel the auction at any time and to structure a sale on an alternative basis.

 

Preliminary agreements

5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Letters of intent

In a bilateral transaction, a letter of intent (or heads of terms) may be negotiated, which broadly sets out the main contractual terms of the intended sale. These terms typically include:

  • The purchase price, and any adjustments to the purchase price, for example through the use of locked box or closing accounts.

  • Types of warranties that may be given.

  • Non-compete covenants that may be given.

Letters of intent often include an indicative timetable and exclusivity and/or confidentiality (or non-disclosure) provisions. Other than in relation to confidentiality and exclusivity provisions, a letter of intent is not normally (and is specifically stated not to be) legally binding.

Exclusivity agreements/provisions

These allow a buyer the right to negotiate exclusively for a period of time with the seller in relation to the acquisition of the company. Typically, a seller will agree to terminate any current talks with third parties, not to solicit any further offers, and not to provide any information to any third party relating to the target company.

Unlike in the case of an agreement to negotiate, equitable relief is normally available in respect of an exclusivity agreement, giving the buyer the right to seek an injunction to prevent or stop a breach by the seller. Alternatively, a buyer can seek damages, normally relating to costs incurred by the buyer in relation to the negotiations. It is important that not only the sellers, but also their advisers and the company's employees are bound by the exclusivity provisions.

An exclusivity agreement also often contains confidentiality provisions. The buyer will also want an exclusivity provision to apply for a longer period than it actually believes necessary to complete the transaction. A seller is keen to agree a shorter time period, to encourage the buyer to complete the transaction quickly.

Non-disclosure agreements/provisions

From a seller's perspective, it is important that the buyer maintains confidentiality in relation to the potential sale of the company and in relation to the information that the sellers provide about the target company. The seller will also be keen to ensure that the buyers do not try and "poach" any employees nor approach any suppliers or customers in relation to the target company.

Equitable relief is normally available in relation to confidentiality agreements, allowing the seller to seek an injunction to prevent breaches of the non-disclosure obligations. Increasingly non-disclosure agreements are mutual, so that the seller is also under an obligation to maintain confidentiality, and not to disclose any information that the buyer may provide to the sellers in relation to its business. Again, both seller and buyer will want to ensure that the agents, advisers and employees of the other side are also bound by the non-disclosure requirements.

If the transaction does not proceed, it is important that the seller is entitled to obtain from the buyer all documentation that the buyer may have received, and also to require the buyer to destroy any documentation it has that is derived from the information which has been sent to it or which is not capable of being physically returned, including deleting copies of such information on its IT systems. It is best practice to allow an ultimate buyer of the business to be able to enforce confidentiality obligations that may have been given to other prospective buyers who did not proceed with the acquisition, sometimes by making the target a party to all of the confidentiality agreements that may have been entered into by the seller with potential buyers in connection with the sale.

 

Asset sales

6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

The employment and employment terms of employees will transfer automatically, by operation of law (that is, under TUPE), where a business or undertaking transfers from one employer to another and retains its identity. This principle of automatic transfer applies to asset sales where employees are involved and a business (or part of it) continues as a going concern, post-closing. Exception to the application of TUPE is limited and any attempt to exclude it is void.

It is important that affected employees are identified early, not only in terms of the potential liabilities, but to enable compliance with informing and consulting obligations required by TUPE (see Question 31). Failure in respect of this attracts substantial penalties.

Other assets and liabilities (including tax liabilities) will not automatically transfer. They need to be specified in the asset sale agreement as an asset that is to transfer or a liability that is to be assumed, subject to any consent or approval that may be required for such transfer or assumption. It is vital that the schedule of assets and assumed liabilities is clear so that there is no dispute as to what has been transferred.

 
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?

As a matter of general law creditors do not need to be notified or give consent to a transfer of assets. However, the terms of loan and other creditor agreements of the seller will need to be checked to ensure that there are no restrictions or prior notifications requirements contained in the agreement. In addition, in the case of a cross-border merger of a UK company with another EEA company, where the jurisdiction of the English courts applies, a meeting of creditors to approve the transfer of assets and liabilities pursuant to the merger may be ordered by the court. Where a deposit-taking business is being transferred in accordance with the provisions of Part VII of the Financial Services and Markets Act 2000 (as amended), no creditor consents are required, although there is a requirement to advertise the relevant court hearings and creditors are entitled to attend and register grievances as part of the procedure.

If a creditor has security over the assets to be transferred, it is necessary to inform the secured creditor, for example a bank having lent money to the seller, a landlord with a rent deposit, or a finance company providing assets through hire purchase or leasing arrangements, of the sale, and to obtain a release and confirmation of non-crystallisation of that security prior to the transfer of the asset. Leasing and hire purchase agreements will need to be novated by the third party creditor for the benefit of the buyer.

Different considerations apply if the asset sale is by way of an administration or insolvency process.

 

Share sales

8. What common conditions precedent are typically included in a share sale agreement?

Conditions precedent are highly transaction (and leverage) specific, but may include, among others:

  • Shareholder approval.

  • That there has been no material adverse change since the sale agreement was signed.

  • Approval of competition authorities.

  • Tax clearances (this is normally for the benefit of the sellers).

  • Reorganisation of the target business.

  • Any industry specific consents.

  • Any third party consents, for example, change of control provisions in a contract or from a regulator.

It is not typical in the UK for there to be a financing or board approval condition. These would normally be expected to have been obtained before signing.

 

Seller's title and liability

9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

Where the sellers are stated in the sale agreement to be selling the shares or assets with "full title guarantee", the following covenants are implied into the sale:

  • Seller has the right to make the sale.

  • Seller will make reasonable efforts to pass title to the buyer at its own cost.

  • The shares or assets being sold are free from charges, encumbrances and adverse rights, other than those that the seller does not know about or could not reasonably be expected to know.

  • Certain additional covenants are implied in the case of the sale or transfer of real property.

As a buyer will not usually be prepared to accept the above "reasonable efforts" or "known encumbrances" limitations, the sale agreement will usually contain an express and unqualified covenant as to the seller's title to the shares or assets concerned.

 
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?

Seller

Sellers can be liable for a pre-contractual misrepresentation, misleading statements or negligent or fraudulent representations. However, an entire agreement clause is typically included in the sale documentation, together with a specific exclusion in relation to any pre-contractual misrepresentation, misleading statements or similar matters, so that the only actionable statements made in relation to the target company are those contained in the sale documentation itself. However, fraudulent misrepresentation cannot be excluded by contract.

Advisers

To the extent that advisers are negligent, they could be liable for negligent misstatements and, as agent for the seller (or buyer) their misrepresentations could lead to liability for the seller as if the seller (or buyer) made such statements themselves (see above, Seller). They may also incur liability to their client, the seller (or buyer) on similar grounds. However, typically, the adviser will exclude that liability in its engagement letter with their client, and obtain an indemnity against any claims made by the third party.

 

Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?

In a share sale, typical documents include:

  • The sale and purchase agreement (in an auction, usually prepared by the seller and in a bilateral arrangement, sometimes produced by the buyer).

  • A disclosure letter qualifying the warranties, produced by the seller.

  • A tax deed under which the seller agrees to pay to the buyer amounts in respect of pre-closing tax liabilities of the target (although this could instead be part of the sale and purchase agreement).

  • Board minutes, dealing with change of directors, change of bank auditors, change of registered office, and approval of share transfers on closing.

  • Stock transfer form(s) (the document by which shares are actually transferred).

  • New employment contracts or similar (sometimes).

  • Any change of control consents.

  • Any release(s) of security documentation.

In an asset sale, like a share sale, there will be a sale and purchase agreement (sometimes called an asset sale or business sale agreement) to transfer the assets and liabilities. In an auction, this is produced by the seller and in a bilateral process it is sometimes produced by the buyer. In addition, there will usually be:

  • A disclosure letter qualifying the warranties, produced by the seller.

  • Notices of assignment of contracts and/or novation agreements where necessary.

  • Consultation documentation under TUPE.

  • Assignments that may be required for registered intellectual property, goodwill, software licences, and leased property.

  • Transfers of freehold property, where relevant.

In both a share sale and an asset sale, transitional services agreements may be required, to the extent that the target company or the businesses being sold cannot operate on a standalone basis immediately following closing of the sale. The transitional service agreement often contains provisions relating to, for example, payroll, IT, insurance, legal and administrative services, but this is highly transaction specific.

 

Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?

In a share sale and purchase agreement typical provisions include:

  • Definitions.

  • The general obligation to sell and purchase the shares.

  • Conditions and closing requirements.

  • Warranties.

  • Limitations on the seller's liabilities with respect to the sale (for example, under the warranties).

  • Any specific indemnities (note that the tax deed and certain other indemnities may be contained in separate deeds of indemnity).

  • Non-compete restrictions.

  • If appropriate, a parent company guarantee (usually in respect of the seller).

  • Confidentiality restrictions.

  • Boilerplate clauses relating to announcements, costs, interests, notices, assignments, third party rights, entire agreement and further assurance.

  • Governing law and jurisdiction clauses.

Typically, a share sale and purchase agreement will contain schedules relating to:

  • The sellers (if more than one).

  • Details of the target company and its subsidiaries.

  • Warranties.

  • Closing arrangements and where applicable provisions relating to escrow arrangements.

  • Conduct of the target's business between signing and closing.

  • Any adjustment in the consideration by way of, for example, a working capital adjustment, any arrangements relating to an earn out or additional consideration or deferred consideration, and limitations on liability.

  • In the case of "locked box" deals (where there is no adjustment to the purchase price following closing), any items of "permitted leakage" (that is, outflows of money or assets from the target group which are permitted prior to closing without that triggering a corresponding indemnity).

An asset sale and purchase agreement will contain similar provisions, but will also contain provisions relating to:

  • Consultation with employees under TUPE.

  • Apportionments of prepayments, and so on.

  • Assignment of contracts.

  • Assumption of liabilities (including indemnities by the buyer in respect of assumed liabilities and by the seller in respect of any liabilities of the target's business excluded from the sale).

Further, the agreement will also contain:

  • Schedules listing all the assets and liabilities and transferred employees.

  • Provisions dealing with third party consents, for example in relation to contracts and leasehold properties.

  • Provisions dealing with the arrangements agreed with respect to the seller's pension scheme (see Question 33).

 
13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

There is no reason why a share sale agreement cannot be governed by a foreign governing law. However, in relation to specific areas, local law will still apply despite the governing law, for example in relation to employee consultation. In addition, local law will apply in relation to the actual transfer of assets or shares and any assumption of liabilities.

In relation to applying foreign law, enforcement provisions also need to be considered, for example, the grounds on which an English court would not apply a foreign law (because it was contrary to public policy, and so on), as well as relevant treaties relating to the enforcement of foreign judgments.

 

Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?

Warranties and indemnities are an important part of any acquisition agreement, whether a share sale or asset sale. In relation to a share sale, warranties typically cover:

  • The share capital of the company and group structure.

  • Capacity of the seller(s) to enter into the agreement and sell.

  • Financial accounts and records.

  • Other information (possibly contained in a data room or the disclosure letter).

  • Changes since the accounting date.

  • Warranties relating to assets, such as unencumbered title, condition and adequacy for the target's current business.

  • Intellectual property rights.

  • Computer systems.

  • Employees.

  • Pensions.

  • Contracts, including suppliers and customers.

  • Insurance.

  • Litigation/disputes/investigations.

  • Environmental issues.

  • Compliance with laws.

  • Anti-bribery compliance.

  • Insolvency.

  • Change of control provisions and other effects of the sale on the target's business.

There will also likely be a separate tax deed relating to tax matters (see Question 11).

In share sale and purchase agreements, remedies for breach of warranties are often left subject to common law principles; that is, if there is a breach of warranty, subject to any agreed limitations on the seller's liability, the measure of damage is the diminution in the value of the shares acquired.

In relation to an asset sale, warranties are similar but with a focus on the assets and liabilities actually being acquired. The measure of damages for breach of warranties on an asset sale is, in principle, usually the same as for a share sale, unless the parties have agreed that a different measure (for example, damages on an indemnity basis in respect of any missing or "damaged" assets) is to apply.

 
15. What are the main limitations on warranties?

Limitations on warranties

Limitations on warranties typically include:

  • Time periods by which a claim can be made (see Question 16).

  • A cap on liability, which typically can be anywhere between 30% and 100% of the consideration (but often is closer to 50% (or even less)).

  • De minimis levels before claims can be made, on an individual and an aggregate basis.

  • Provisions relating to how to conduct a dispute that may arise relating to a breach of warranty and a third party claim.

  • A general obligation to mitigate any loss suffered.

  • Matters disclosed in the disclosure letter.

Other restrictions include:

  • The sellers qualifying warranties within the knowledge of certain individuals.

  • Preventing double recovery and requiring credit to be given for certain provisions or reserves in accounts.

  • Requiring the buyer to exhaust its rights against insurers and other relevant third parties.

  • Excluding the seller's liability for contingent claims until or unless they become actual.

  • In some circumstances, limiting the buyer's right to recovery by way of buyer's knowledge (though this is often resisted).

Certain core or fundamental warranties (for example, relating to the seller's title to the shares or assets being sold) are typically not subject to the same limitations as apply to the "business warranties".

Qualifying warranties by disclosure

Warranties are normally qualified by way of a disclosure letter, that is, they are given subject to matters (usually stated to be "fully and fairly") disclosed in the disclosure letter. A warranty can within its wording be absolute, but the seller can qualify that warranty by informing the buyers through a disclosure letter of issues relating to the warranty. For example, a warranty may say that there is no relevant litigation, whereas a disclosure letter will list the litigation that actually exists.

Typically, there are both general disclosures, for example, disclosures of matters in public records, the Companies Registry or Land Registry, and specific disclosures relating to specific warranties.

To the extent that a matter is disclosed and therefore qualifies the warranties, no claim can be made in relation to the warranties to the extent of the disclosure.

The sale agreement will usually contain a definition as to what is deemed to be a disclosure or disclosed and will require this to meet a test of "full and fair" disclosure by, for example, requiring any disclosures to be "disclosed in such a manner and with such detail as to enable the buyer to make a reasonable informed assessment of the fact, matter or information concerned, its nature and effect".

 
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies

Remedies are typically on a common law or, where the parties agree this in the relevant documentation, on an indemnity basis. In relation to the common law basis, the remedy is the diminution in the value of the shares or assets acquired arising as a result of the warranty. An indemnity basis of recovery covers the cost of remedying the breach, irrespective of whether there has been a diminution in the value of the shares or asset acquired.

Time limits for claims under warranties

These are open to negotiation between the parties. The time limits for non-tax warranties will cover at least the first (and often the second) audit of the target under its new ownership and may extend up to three years for general warranties. The time limit for tax claims (both under the tax warranties and the tax deed) is typically longer, and may extend up to six or seven years in UK deals (or the statute of limitations in other jurisdictions such as the US). Some other areas such as environmental and intellectual property may also have longer periods of time. On an asset sale, there may be a shorter period of time for general warranties, on the basis that only identified liabilities and identified assets have transferred, therefore a buyer should be able to identify in a shorter period of time whether any of the warranties have been breached.

 

Consideration and acquisition financing

17. What forms of consideration are commonly offered in a share sale?

Forms of consideration

By far the most typical form of consideration is cash. There may be a cash retention or escrow against warranty claims. In addition to cash, from a tax planning perspective, sellers may prefer to receive loan notes and sometimes equity is also offered.

Factors in choice of consideration

Typically, these are driven by the seller's tax planning. If a seller wants to defer some of the capital gains that may be created on the sale of the shares, it may wish to receive, instead of cash, securities that allow capital gains to be deferred. These securities can be loan notes or equity.

From a buyer's perspective, there is often little tax advantage in any particular structure. However, from a treasury perspective to the extent that the buyer can defer some of the payment of cash, this may be attractive.

 
18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?

Structure

The main ways for a UK-listed company to raise equity finance are a rights issue, open offer, placing or vendor placing. The listed company will need to consider the impact of a fundraising on the existing shareholders, and whether this should be done on a pre-emptive basis or non pre-emptive basis. A pre-emptive basis would be by way of a rights issue or an open offer and a non pre-emptive basis would be by way of a placing or vendor placing. Small acquisitions are likely to be done on a non pre-emptive placing basis. To do this, the company will need to have the shareholder authorisations for share issues under the Companies Act 2006 in place, both for the board to issue shares and for the issue to be made on a non pre-emptive basis.

Vendor placings can be used irrespective of whether the board has the authority to issue shares on a non pre-emptive basis. A vendor placing is not a cash issue for the purposes of section 561 of the Companies Act, as the shares are issued in exchange for shares and not for cash. A typical vendor placing involves the buyer issuing shares that are allotted to the seller in exchange for shares in the target. The shares allotted to the seller are placed on behalf of the seller in the market by the buyer's bank and the seller receives cash from that placing.

Premium listed companies will also have to follow relevant requirements of the FCA’s Listing Rules with respect to rights issues, open offers and placings, as well as the share capital maintenance and pre-emption requirements of the Investment Association and the Pre-emption Group.

Consents and approvals

In addition to ensuring that any necessary shareholder approval or authority for any equity financing issue is in place, if the acquisition is of a certain size a Premium listed company may also have to obtain shareholder approval for the acquisition (or disposal). If, on certain percentage tests, the calculation is 25% or more, it will be necessary to obtain shareholder approval. The tests are:

  • Gross asset test: dividing the gross assets subject to the transaction by the gross assets of the listed company.

  • Profits test: dividing the profits attributable to the assets subject to the transaction by the profits of the listed company.

  • Consideration test: taking the consideration for the transaction as a percentage of the aggregate market value of the ordinary shares of the listed company.

  • Gross capital test: dividing the gross capital in the company being acquired by the gross capital of the listed company.

Requirements for a prospectus

If the acquiring company's equity financing involves an offer to the public or the admission of shares to trading on a regulated market (such as the London Stock Exchange's Main Market) a prospectus may be required in respect of the share issue. Different exemptions from the need to prepare and publish a prospectus apply, depending on whether the shares are being offered to the public or admitted to trading on a regulated market. For example, an offer of shares to fewer than 150 persons per EEA member state or solely to "qualified investors", or the admission of shares to trading that represent, over a period of 12 months, less than 10% of shares of the same class of the issuer already admitted to trading, will not require the issue of a prospectus.

 
19. Can a company give financial assistance to a potential buyer of shares in that company?

As a general rule, private companies can give financial assistance for the purchase of shares in themselves. However, private companies cannot directly or indirectly give financial assistance for the purchase of shares (or reduction of any liability incurred for the purposes of such an acquisition) of a public holding company, and a public company cannot directly or indirectly give financial assistance for the purchase of its own shares or those of its private holding company (or reduction of any liability incurred for the purposes of any such acquisition).

Financial assistance includes granting security over assets, repayment of existing indebtedness, selling assets at the time of the acquisition of shares and any other material financial assistance.

Even where financial assistance can be given, the directors will generally need to be satisfied that the assistance is given in good faith in the interests of the company, and otherwise is consistent with their duty to act in a way that they consider in good faith would most likely promote the success of the company for the benefit of members as a whole.

 

Signing and closing

20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?

Signing

If there is a gap between signing and closing, at signing the sale and purchase agreement and the disclosure letter are signed. Other documents are usually in agreed form. Typically, board resolutions approving the documentation that has being entered into and the transaction overall are also signed at this stage.

Closing

In a share sale, the following are often produced and executed on closing:

  • Stock transfer form(s).

  • Any waivers or consents to give full and legal beneficial title.

  • Resignation letters of officers and appointment letters for new officers.

  • New bank mandate forms.

  • Board meetings and minutes to actually record the formal transfer and resignations and appointments.

In an asset sale, the following are also typically produced on closing:

  • Title documents for all the assets being transferred. For example in relation to real estate, original documentation and any assignment of a leasehold interest or transfer of freehold property.

  • Duly executed assignments of business intellectual property rights.

  • Consents from any third party to the assignment of intellectual property licences.

  • Consents to assignment of any IT contracts and consequential licence arrangements.

  • Assignments of any contracts being transferred or novations.

  • Evidence of release and discharge of any security over relevant assets.

 
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?

Most transaction documents can be executed by a company under hand or as a deed. If executed under hand, the documents simply need to be signed by an authorised officer (and will usually be supported by an appropriate board minute). If the documents are executed as a deed, they will need to be signed by two authorised signatories (that is, any of the directors or a company secretary) or by one director in the presence of a witness (and will usually be supported by an appropriate board minute). It should be clear that the entire document was joined together (whether physically or circulated as an entire document by e-mail in accordance with the practice note: Execution of documents by virtual means, issued by The Law Society) upon execution (that is, that signature pages are not signed separately and then attached to the relevant document). Documents can also be executed under the company's common seal (if the company has one). In England and Wales there is no need to have such executions formally notarised.

 
22. What are the formalities for the execution of documents by foreign companies?

It is generally sufficient that foreign companies simply execute documents in accordance with their own charter and laws. Typically, a legal opinion is sought as to the validity of the signature and enforceability of the contract.

 
23. Are digital signatures binding and enforceable as evidence of execution?

Electronic or digital signatures are binding and enforceable as evidence of execution, and are admissible in evidence in legal proceedings in relation to any questions about the authenticity of the signatory. The Electronic Communications Act 2000 provides for the admissibility of electronic signatures as evidence in relation to the authenticity of communications, and so on.

In addition, Regulation (EU) No. 910/2014 on electronic identification and trust services for electronic transactions in the internal market provides that an electronic signature will not be denied legal effect and admissibility as evidence in legal proceedings, solely on the grounds that it is in electronic form or does not qualify as a "qualified electronic signature". Under this Regulation, a qualified electronic signature has the legal effect of a handwritten signature and is an electronic signature which, among other requirements, must be uniquely linked to the signatory. However in England, qualified electronic signatures are little used. In July 2016, the Law Society issued a practice note, Execution of a document using an electronic signature, which should be borne in mind when parties propose to execute a document using electronic signatures.

 
24. What formalities are required to transfer title to shares in a private limited company?

To transfer title to shares in a private limited company, a stock transfer form must be signed. The stock transfer form will then need to be stamped with stamp duty (see Question 25). Once stamped and the transfer is approved by the company’s board, the register of members is updated. Under the Companies Act 2006, legal ownership of shares is determined by the entries on the register of members. Until the register of members is updated, the buyer has beneficial ownership of the shares, and normally obtains a power of attorney from the seller to exercise any rights of the legal owner it needs in relation to the shares.

An acquisition of a UK company is also likely to trigger the need to update the company's register of people with significant control over it (as well as certain other registers of the company).

 

Tax

25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Subject to certain exceptions, stamp duty and/or stamp duty reserve tax is payable on a sale of shares, as a percentage of the amount of consideration paid for the shares, at the rate of 0.5% (in the case of stamp duty, the consideration paid in respect of each stock transfer form is rounded up to the nearest GB£5).

Asset sale

Stamp duty land tax is payable on the transfer of any real estate. It is payable as a percentage of the amount of consideration paid and allocated to the real estate, at the following rates for commercial real estate (different rates apply to residential real estate):

  • For the portion up to GB£150,000: nil.

  • For the portion over GB£150,000 but no more than GB£250,000: 2%.

  • For the portion over GB£250,000: 5%.

If, instead of transferring an existing interest in land, a new leasehold interest is granted to a buyer, duty will be calculated by reference to the "net present value" of the rents reserved under the lease (determined in accordance with a formula set out in the relevant legislation), as follows:

  • Net present value of rent for the portion up to GB£150,000: nil.

  • Net present value of rent for the portion over GB£150,000 but no more than £5 million: 1%.

  • Net present value of rent for the portion over GB£5 million: 2%

If a premium is also paid on the grant of the lease, stamp duty land tax is also payable on this at the rates set out above for commercial real estate (save that, if the annual rent reserved under the lease exceeds GB£1,000, there is no nil rate band, so that duty is payable on any amount up to GB£250,000 at the 1% rate).

 
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

Save where the consideration for the shares is less than GB£1,000 (in which case no stamp duty is payable) there are no stamp duty exemptions or reliefs available to a third party/unconnected buyer on a share sale.

Under general stamp duty principles, if the buyer agrees to discharge the target company's/group's debt this forms part of the consideration for the shares it acquires, and is subject to stamp duty. However, it may be possible to restructure such an obligation or agreement so that this element is not subject to stamp duty.

There is no stamp duty on shares quoted on growth markets such as the Alternative Investment Market and the ISDX Growth Market. To qualify for recognition by HM Revenue and Customs as a "recognised growth market", a market must be a "recognised stock exchange" and satisfy certain other requirements as to the average market capitalisation and history of growth of companies trading on the market. Outside the context of recognised growth markets, the UK stamp duty and stamp duty reserve tax position does not generally depend on whether the shares are listed.

Asset sale

There are no stamp duty land tax exemptions or reliefs available to a third party/unconnected buyer acquiring real estate as part of an asset sale.

It may be possible to mitigate liability by apportioning consideration away from any real estate and on to other assets. However, this must be done on a just and reasonable basis. If not, the relevant legislation will re-allocate the consideration on such a basis, to determine stamp duty land tax liability.

 
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Corporation tax is payable by a corporate seller on a share sale. It is payable by reference to the gain made by the seller on the sale. This, broadly speaking, is the difference between the amount paid for the shares and the amount received on the sale.

The current main rate of UK corporation tax is 20% for non-ringfence profits, due to fall to 19% in 2017, and to 17% in 2020.

Asset sale

Corporation tax is payable by a corporate seller on an asset sale at the same rates (see above, Share sale). This is calculated by reference to the income profits and gains arising on the sale. This in turn is determined by reference to the nature of the assets sold (for example capital assets and trading stock), their tax value and the amount of the consideration allocated to them.

 
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

Any gain made by a corporate seller is exempt from UK corporation tax if the disposal qualifies for the UK's substantial shareholdings exemption. In outline, the basic conditions that usually need to be satisfied to qualify for this exemption are:

  • The seller holds at least 10% of the ordinary share capital of the company being sold (and is beneficially entitled to no less than 10% of the profits available on distribution and assets available on a winding up to the equity holders of the company) throughout a 12-month period, beginning no more than two years before the date of disposal.

  • The seller is a sole trading company or holding company of a trading group in the latest 12 month ownership period through which the ownership conditions above are met, at the time of the disposal, and immediately after the disposal.

  • The company in which the shares are held must also have been a trading company during the ownership period set out in the first bullet point above and immediately after the disposal.

Asset sale

Although there are no specific exemptions or reliefs available on an asset sale to a third party/unconnected buyer, there are a number of ways a seller can try to minimise corporation tax that would otherwise crystallise on the sale. For example:

  • The seller could seek to allocate more consideration to those assets with a higher tax base cost (to reduce the amount of gain arising).

  • If the seller has unused capital losses, it may consider allocating more consideration to capital assets if gains arising can be offset by those losses.

  • Reducing the consideration allocated to stock, which would otherwise be treated as taxable trading income, unless the seller has unused trading losses that could be set against this income.

  • Reducing the consideration allocated to plant and machinery to increase allowances or reduce charges under the UK's capital allowances regime.

  • Increasing the consideration allocated to land, fixed plant and machinery and intellectual property if the seller intends to reinvest part of the consideration in similar replacement assets that qualify for rollover relief. This would defer any tax charge until a subsequent disposal of the replacement assets.

However, each of these need to be balanced with the buyer's tax position/objectives, as the amounts allocated to the various assets form the buyer's tax base cost in those assets, and would impact on the amount of tax allowances available to it. It would also potentially affect the amount of stamp duty land tax payable by the buyer (see Question 25).

 
29. Are other taxes potentially payable on a share sale and an asset sale?

Value added tax (VAT) may be payable by a buyer on an asset sale if it does not qualify as a transfer of a going concern. This may be an absolute cost to a buyer if it cannot recover all of its input VAT. A share sale is VAT exempt.

 
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?

Companies in the same group relief group are generally able to surrender losses for tax purposes. Losses available for surrender in this way include trading losses and, for example, losses generated in a bid vehicle through payment of interest expenses.

However, there are a number of restrictions that can limit this ability. In particular, companies are not able to surrender capital losses (although in practice there are other ways to enable companies to access capital losses of other members of their group).

 

Employees

31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?

Asset sale

Where employees are involved in the sale, TUPE requires both the seller and buyer to inform and potentially consult with employee representatives. This is apart from obligations under TUPE which require the seller to provide employee liability information to the buyer.

Appropriate employee representatives may be a recognised trade union or elected employee representatives (for transfers taking place after 31 July 2014, an employer with fewer than ten employees can inform and consult directly with the employees, rather than with representatives, provided that there are no existing representatives in place). The representatives of all employees affected by the sale, including those not transferring, must be provided with specified information, including when the sale is due to take place, the reasons for it and the likely impact on them.

The buyer must also inform the seller of any post-transfer measures it envisages as a result of the asset sale that will affect the transferring employees, for example redundancies, changes to employee benefits or different working arrangements. Where any such measures are anticipated, this triggers an additional obligation under TUPE to consult with the employee representatives.

No specific timeframe for completing the informing and consulting exercise is prescribed by TUPE, save that the duty to inform employee representatives must be undertaken long enough before the sale/transfer to enable adequate consultation to take place, where it is required. Where there is a gap between signing of the sale agreement and closing, it is typical for the informing and consulting exercise to be carried out during that period.

TUPE permits the buyer to undertake consultation on planned post-transfer redundancies directly with representatives of the seller's employees prior to the transfer, subject to conditions including the seller's consent.

Employee consent to an asset sale is not required but TUPE does allow employees to object to the transfer of their employment. In that event, and assuming there is no underlying claim for unfair dismissal, the employees are deemed to have resigned with effect from the transfer date without any rights to severance payments.

Share sale

In employment terms, a share sale does not involve a change in employer. As a result, the employees' contracts continue and there is no statutory obligation to inform or consult employees. There is also no need to obtain employee consent.

However, an obligation to inform and/or consult employees under TUPE could still apply before or following a share sale, for example, if an asset sale precedes the share sale or the employees transfer to a holding company following the share sale. Any existing agreements with existing trade unions or employee representatives should also be checked to ensure that they do not under their terms require consultation on a share sale, although in practice it is rare to see such obligations on a share sale.

 
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?

Asset sale

TUPE applies to asset sales where employees are involved and a business (or part) continues as a going concern, post-closing. Exception to the application of TUPE is limited and any attempt to exclude it is void.

Where TUPE applies, the employment and employment terms of employees, along with most associated liabilities of the seller, will transfer automatically to the buyer, by operation of law.

This principle of automatic transfer means that the transfer itself cannot provide legitimate grounds for dismissal. Dismissal of transferring employees by reason of the transfer is therefore automatically unfair (a liability which itself transfers to the buyer) unless the employer can establish a legitimate defence in the form of an economic, technical or organisational reason, entailing changes in the workforce. Redundancy would constitute such a reason but it is important to note that the seller cannot simply dismiss transferring employees because the buyer has indicated that it wishes to take the business with fewer employees, but would have to show genuine organisational or structural change within its own business.

Share sale

In employment terms, a share sale does not involve a change in employer. As a result, the employees' contracts continue, and any associated or contemporaneous dismissals are subject to the normal unfair dismissal rules.

Transfer on a business sale

See above, Asset sale.

 

Pensions

33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?

Private pension schemes

Participation rates vary from one employer to another. However, in 2012 only around one third of employees in the private sector were members of an occupational pension scheme. In contrast, over 80% of employees in the public sector were members of an occupational pension scheme.

However, the number of employees participating in a workplace pension scheme is increasing, due to the introduction of automatic enrolment. Automatic enrolment has been phased in since 1 October 2012, starting with the UK's largest employers. By February 2018, the automatic enrolment requirements will apply to all employers with workers in the UK.

Under the automatic enrolment requirements, employers are required to automatically enrol eligible workers into a workplace pension scheme, and pay a minimum level of contributions or provide a minimum level of benefits. Workers have the right to opt-out after they have been automatically enrolled.

Pensions on a business transfer

Unlike most employment terms, rights to old-age, invalidity and survivors' benefits under an occupational pension scheme do not transfer to the new employer on a business transfer covered by TUPE. Therefore, if the former employer operated an occupational pension scheme for its staff, generally speaking, the right to those benefits will not transfer under TUPE.

However, in a series of cases, the Court of Justice of the European Union has held that the right to a benefit under an occupational pension scheme that is not an old-age, invalidity or survivors' benefit, such as enhanced pensions payable on redundancy or early retirement, will transfer under TUPE and can be enforced against the new employer. These are commonly referred to as Beckmann and Martin rights, after the cases that established this principle. Normally, a buyer will seek an indemnity from the seller in respect of any such rights that may transfer.

In addition, if the former employer provided the transferring employees with access to an occupational pension scheme to which it contributed, the new employer will be required (as a minimum) to provide the transferring employees with access to an occupational pension scheme or stakeholder scheme, under which the new employer is required to pay employer contributions that either match the employee's contributions up to 6% of basic pay, or the former employer's contribution if the former employer was required to make contributions.

Alternatively, if the transferring employees have a contractual right to join a contract-based pension scheme (such as a group personal pension scheme or a self-invested personal pension) and to receive employer pension contributions, that contractual right will transfer and be enforceable against the new employer under TUPE. In addition, any other contractual rights that a transferring employee has in respect of their pension entitlement will be enforceable against the new employer under TUPE.

Following a business transfer, the new employer will need to comply with the automatic enrolment requirements in respect of the transferring employees immediately after the transfer or from its staging date (that is, the first date on which the automatic enrolment requirements apply to that employer), whichever is later.

 

Competition/anti-trust issues

34. Outline the regulatory competition law framework that can apply to private acquisitions.

EU competition law

Under the EU Merger Regulation, there is a mandatory notification and clearance requirement for concentrations with an EU dimension. The jurisdictional thresholds for notification to the European Commission are either (unless, in either case, each of the parties achieves two-thirds of its EU turnover in one and the same EU member state):

  • Where both of the following conditions are satisfied:

    • combined worldwide turnover of the parties exceeds EUR5 billion; and

    • EU-wide turnover of at least two of the parties exceeds EUR250 million.

  • Or all of the following conditions apply:

    • combined worldwide turnover exceeds EUR2.5 billion;

    • EU-wide turnover of at least two of the parties exceeds EUR100 million each;

    • combined turnover in each of at least three member states exceeds EUR100 million; and

    • turnover in each of those three member states by each of at least two of the parties exceeds EUR25 million.

The substantive test for clearance is whether the concentration will significantly impede effective competition in the EU or a substantial part of it, in particular by creating or strengthening a dominant position.

UK competition law

The UK operates a voluntary two-phase merger review procedure. Under the Enterprise Act 2002, the UK authorities have jurisdiction where one of the following tests is satisfied:

  • The UK turnover of the target exceeds GB£70 million.

  • The merger creates or enhances a 25% share of supply (or purchases) of goods or services in the UK (or in a substantial part of it).

Qualifying mergers can be notified to the CMA, which replaced the Office of Fair Trading and the Competition Commission as the UK's economy-wide competition authority on 1 April 2014. Notification is voluntary; a merger can be completed without making any notification to, or obtaining clearance from, the CMA. However, the CMA has a market intelligence function whose role is to identify potentially problematic transactions. The CMA has the power to refer a transaction for in-depth investigation up to four months after the transaction becomes unconditional and is made public.

The CMA has a duty to refer mergers (anticipated or completed) for an in-depth Phase 2 investigation by an independent group of at least three experts selected from a panel appointed by the Secretary of State (the Inquiry Group), where the CMA believes that it is, or may be, the case that a relevant merger situation has resulted or may be expected to result in a substantial lessening of competition in a UK market. It is possible to secure conditional clearance in Phase 1 by offering a remedy to address concerns which would otherwise warrant an in-depth Phase 2 investigation.

On such a reference, if the Inquiry Group finds the merger has resulted or may be expected to result in a substantial lessening of competition, it must determine how to remedy, mitigate or prevent the adverse effects. At the end of its investigation, therefore, the Inquiry Group will clear, impose conditions on, or block entirely, a transaction which has been referred to it.

 

Environment

35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?

The general principle is that the polluter pays irrespective of the occupier of the site. However, if the polluter cannot be identified it is possible for the occupier to be liable for any costs of a clean-up. Due diligence should be carried out on leases to ensure the leases do not contain any obligations on the occupiers relating to environmental liabilities.

 

Online resources

UK legislation

W www.legislation.gov.uk

Description. Official website where original language text of the legislation referred to in this article can be obtained. The website is managed by The National Archives on behalf of the government.



Contributor profiles

Laurence Levy

Shearman & Sterling (London) LLP

T +44 20 7655 5717
F +44 20 7655 5479
E laurence.levy@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 1988

Areas of practice. Public and private M&A; joint ventures; restructurings; equity capital markets; general corporate advisory transactions.

Recent transactions

  • Intercontinental Exchange (ICE) on its US$650 million acquisition of Trayport in ICE common stock.

  • Qatar Investment Authority on its GB£2.6 billion offer for Songbird Estates plc and the follow-on GB£4.1 billion offer for Canary Wharf Group plc.

  • Viacom on its GB£450 million acquisition of Channel 5 Broadcasting.

Jeremy Kutner

Shearman & Sterling (London) LLP

T +44 20 7655 5743
F +44 20 7655 5443
E jeremy.kutner@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 2003

Areas of practice. Public and private M&A; joint ventures; restructurings; equity capital markets transactions.

Recent transactions

  • Liberty Global plc on its acquisition of Virgin Media Inc in a stock and cash merger transaction valued at about US$23.3 billion.

  • Barry Callebaut, the world's leading manufacturer of high-quality cocoa and chocolate, on its acquisition of a Singaporean cocoa ingredients business for about US$1 billion.

  • The Sale of Activas Group hf to Watson Pharmaceuticals for up to EUR4.5 billion.

Michael P Scargill

Shearman & Sterling (London) LLP

T +44 20 7655 5161
F +44 20 7655 5274
E michael.scargill@shearman.com
W www.shearman.com

Professional qualifications. England and Wales, Solicitor, 1980

Areas of practice. Public and private M&A; joint ventures; cross-border mergers; equity capital markets; corporate governance; corporate knowhow management.

Recent transactions

  • Bondholder group on the GB£1.5 billion recapitalisation of The Co-operative Bank Plc.

  • Liberty Global, Inc. in connection with its acquisition of Virgin Media in a stock and cash merger transaction valued at about US$23.3 billion.

  • Singapore Airlines Limited in relation to the sale of its 49% stake in Virgin Atlantic Limited to Delta Airlines, Inc.


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